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Budget 2010 Home Page 2010 Investment Statement of the Government of New Zealand

Investment Intentions

The previous sections have been largely descriptive, covering what assets and liabilities are on the Crown's balance sheet, how they are performing and how they are forecast to change on the basis of current policy settings. In contrast, this section sets out the Government's high-level intentions, or strategy, for how the composition of the balance sheet will be shaped over time and how the performance of the individual components will be improved.

The Government's high-level investment intentions are summarised by the following five themes:

  • rebuilding resilience
  • reducing risk exposures
  • sharpening incentives to use existing capital well
  • introducing private sector capital and disciplines where appropriate, and
  • prioritising capital to its highest value use.

Rebuilding resilience

The Crown's balance sheet provides a buffer to shocks and to future fiscal pressures such as an ageing population. The impact of the recent recession and other shocks, such as the Canterbury earthquake, has been mitigated by the Crown's strong fiscal position, but that buffer has now been reduced.

The Government intends to rebuild the buffer as fast as practicable. In particular:

  • The Government's fiscal strategy is to return to surplus as quickly as is practical, thereby minimising the rise in net debt and reduction in net worth.
  • Once the Government has returned to surplus, debt repayments and contributions to NZSF (building up financial assets as a way of pre-funding future fiscal pressures) will resume.
  • Liabilities that can be specifically insured against, such as ACC liabilities other than for residual claims relating to the Non-Earners' Account, should be fully funded over time (ie, sufficient assets to cover associated liabilities).

Reducing risk exposures

At any point in time, the Crown is exposed to a range of fiscal risks. In many cases, it is entirely appropriate for the Crown to bear these risks - eliminating risk is neither desirable nor practical. But in some cases, the Crown is either not best placed to manage a particular risk, or the exposure represents undue risk to the Crown.

The Government intends to reduce specific risk exposures that meet these criteria as conditions permit. Particular examples are:

  • The Retail Deposit Guarantee Scheme introduced in late 2008 has now largely ended (with a limited extension now operating), limiting the taxpayers' exposure to finance company failures.
  • South Canterbury Finance's assets will be disposed of as fast as practicable consistent with getting most value for taxpayers.

More generally, the Government's focus on rebalancing the economy and increasing national savings will also reduce the wider risks to the Crown's tax base and fiscal position.

Sharpening incentives to use existing capital well

The Government has a stewardship role in delivering good-quality services efficiently. The Government has a high expectation for all users of Crown capital to make efficient use of capital and ensure the services delivered from that capital are effective.

The Government intends to continue using three broad levers to sharpen incentives: greater transparency in both performance and future intentions; higher expectations on performance and efficiency; and more consistent exposure to the cost of capital. In particular:

  • Greater transparency. Recent steps include the National Infrastructure Plan, the COMU APR, and this Investment Statement. Capital-intensive agencies are now reporting on 10-year capital intentions. In the SOE portfolio, transparency has been increased via a continuous disclosure regime and annual public meetings for the larger companies.
  • Higher expectations. The Government has explicitly focused on the performance of assets on balance sheet. For the commercial portfolio, shareholding Ministers have set high performance expectations, including an expectation for higher and more consistent dividends.
  • Exposure to the cost of capital. The rules for agencies' capital asset management have been tightened over the past year, including a new standard for capital business cases. The rules for capital charge are currently being reworked to apply to a wider range of agencies and so that the correct incentives apply. Changes are being investigated for depreciation funding for very large assets.

Introducing private sector capital and disciplines where appropriate

In addition to sharpening incentives within the public sector, private sector disciplines are an additional lever that can improve performance in some circumstances. The Government is pragmatic in wanting to use the full range of levers to improve performance.

The Government will continue to explore where private sector capital and disciplines are appropriate. In particular:

  • Increasing contestability is being investigated in ACC and social housing.
  • PPPs introduce outside expertise and risk-sharing. Currently projects are underway for Wiri prison and being investigated for schools.
  • All agencies are being asked to consider whether efficiency gains can be made by leasing rather than owning some of their assets.
  • The Government will consider whether its current policy of no changes in public ownership in the commercial portfolio is still appropriate for New Zealand. Any change would be announced before the 2011 election.

Prioritising capital to its highest value use

The Government places highest priority on ensuring social services and infrastructure can be delivered to an appropriate quality level. However, given fiscal constraints, capital injections will be less common than in recent years and more agencies will need to live within current balance sheets. The second priority is liquid investments that can be employed when shocks occur. Finally, illiquid investments, in particular further investment in SOEs, are the lowest priority.

The Government's decisions through Budget and other processes will reflect the following priorities:

  • Priorities in upcoming Budgets are key social infrastructure - with a focus on investments that will transform the efficiency, effectiveness and sustainability of public services - and a few specific aspects of economic infrastructure (namely, ultra-fast broadband and KiwiRail's turnaround plan). The Government is setting a high hurdle for business cases to justify new capital. Most areas are expected to manage within their existing capital base, and all State agencies will need to deliver better value from existing capital.
  • Agencies are being asked to consider where disposal of surplus assets (eg closed schools, surplus NZDF properties) can be made without significant impact on service delivery, and how the process of disposals can be sped up. Any capital released can be recycled to higher priority parts of the balance sheet.
  • For the financial portfolio, priorities are restoring reserves and resuming contributions to NZSF as soon as practical.
  • For the commercial portfolio, the priority is generating returns for the owners that can be used for higher priority activities. Free cash flows are expected to be directed primarily to dividend payments rather than new investment and Crown capital injections into SOEs will face a very high hurdle.
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